Lawyers from law firm Heenan Blaikie LLP are rushing to form new ventures and negotiate mergers following the announcement that the firm, once one of Canada’s biggest, is closing the doors.

U.S. giant DLA Piper – the world’s largest law firm – confirmed Thursday it is in talks with a core group of 60 to 70 lawyers from the Toronto and Calgary offices of Heenan with the goal of gaining a toehold in the Canadian market. Another group of 14 lawyers from Heenan’s Vancouver office announced they are leaving to start a boutique firm.

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Law

Sources have said other groups of lawyers are discussing new spin-offs in markets such as Quebec City, and large numbers have already moved to other rival law firms, especially in Montreal and Ottawa.

In a dramatic move that underscores the economic stresses facing many law firms, Heenan said late Wednesday that its partners have agreed to dissolve the 40-year-old firm in an “orderly windup” over the coming months. Insiders said the firm, which is home base for former prime minister Jean Chrétien, struggled with a changing legal market that has less room for middle-tier players like Heenan, which falls between Bay Street’s elite firms and cheaper, specialty boutiques.

Although no final agreement is in place, the biggest potential deal for Heenan lawyers would involve DLA Piper, which has been looking for more than three years for an appropriate firm to combine with in Canada, said Roger Meltzer, DLA’s co-chairman for the Americas.

DLA Piper has watched other global firms such as Norton Rose Fulbright and Dentons enter the Canadian market through combinations with large Canadian law firms. But Mr. Meltzer said DLA sat on the sidelines because it didn’t want to combine with a Bay Street giant in a deal that would require it to take on too many lawyers with too little revenue per lawyer.

“What we were trying to look for was something that was more manageable in size, reflecting what we wanted to do in the market,” he said Thursday. “And the Heenan opportunity came up. For those partners and the people that work at Heenan Blaikie, I’m very sad that this has happened. Even though it’s an opportunity for us, I’m very sad that this has happened.”

Mr. Meltzer said the deadline to conclude a deal is “unknown at the moment” but said talks cannot stretch on for long. “Each side has a sense of urgency about this,” he said.

Part of the urgency stems from the need to reassure clients that their business will be handled without interruption. Heenan was not a major firm for Canada’s largest corporate clients, but had a long client list in Montreal and a strong reputation in areas such as labour and employment law.

The new Vancouver spinoff – which will be called Gall Legge Grant Munroe LLP – will specialize in areas of workplace law and litigation, said Peter Gall, a founding partner of the new firm.

It will include 14 lawyers from Heenan’s Vancouver office and six senior advisers or “associate counsel,” including firm co-founder Roy Heenan and prominent sports lawyer Brian Burke, who is president of hockey operations for the Calgary Flames.

Mr. Gall said he has become convinced that the future for smaller law firms lies in becoming specialized boutiques with lower costs that can offer less expensive services to clients.

“We think in a boutique operation like ours, which will be a much leaner cost structure, that we’ll be able to provide expert but much more affordable services,” he said. “Certainly a different cost structure is really important.”

Heenan was a profitable firm until the end, but was facing daunting economic challenges. Former co-managing partner Norman Bacal said the firm faced a wave of departing lawyers that became a “run on the bank.”

“It was a failure in confidence, not a failure in the business,” he said.

Mr. Bacal said he feels especially “terrible” for the law firm’s hundreds of support staff, for whom he said the firm is trying to help find new jobs.

Mr. Gall said he is deeply sorry that Heenan Blaikie let down its founders.

“Roy Heenan is such a wonderful man, and when he stepped down as the chair, all of us collectively failed in terms of the leadership and the vision to keep the wonderful firm he built together. And I feel very sad about that … But it’s just a different legal world.”

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How Heenan’s dissolution may play out

Heenan Blaikie, a 40-year-old national law firm with offices in nine Canadian cities and in Paris, decided this week to dissolve its partnership. Here’s how law partnerships work, and how a dissolution could unfold.

How law firms are capitalized

Partners put up capital, either all at once or over a period of time. “That money is the partnership’s money to use for working capital,” said Bryce Tingle, who holds the Murray Edwards Chair of Business Law at the University of Calgary. “It’s how it manages its cash flow. The law firm may also have debt from a bank. It will also have trade creditors – people who supply services.”

What happens when partners leave?

In most law firms, partners who leave do not receive their capital back all at once. At Heenan, dozens of partners left over a short period of time. Norman Bacal, who has been overseeing the dissolution, said the wave of departures became a “run on the bank.” He acknowledged that partners will lose a significant portion of their capital.

Who gets paid first?

Whether assets exceed liabilities or a firm is insolvent, the government is the “super-priority,” and is first to be paid taxes owing, including HST. Then come secured creditors, usually banks, and then the unsecured – employees and those who supply services. Partners are personally liable for the unpaid wages of employees. Then the partners are paid, typically (depending on the partnership agreement) splitting the remaining money into equal shares, Prof. Tingle says.

The firm will keep working

To maximize money for creditors and partners, the firm will continue on projects, winding the business down while still generating revenue. “You never just want to shut something down if you’re trying to extract money from it,” Prof. Tingle says.

The clients

Ensuring clients’ files are transferred to other firms and confidentiality is protected is crucial. Clients will be the first priority, Mr. Bacal said.

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